Deal could help AOL, but not Yahoo

Citing “people familiar with the matter,” Bloomberg reported Friday afternoon that AOL CEO Tim Armstrong is in talks with Yahoo advisors gauge interest in merging the two companies.

“Armstrong is discussing options for a combination aimed at strengthening the two Internet companies,” Bloomberg said. “Armstrong had been interested in a merger with Yahoo last year and was rebuffed while Bartz was at the helm, one person said. Her departure prompted him to reconsider the option.”

CNBC later tweeted that a source close to Yahoo said the Sunnyvale, Calif. company was not interested in a deal with its New York-based rival.

AOL and Yahoo declined to comment on the matter.

Colin Gillis, an analyst with BGC Partners, said he could certainly see why Armstrong would angle for a deal with Yahoo—it could get AOL shareholders a premium and Armstrong an executive suite upgrade at a bigger company—but it doesn’t make sense from Yahoo’s perspective.

“Do they really need a dial-up business? Do they need more page views?” he asked. “Do they need to pay $2 billion for a CEO? … Do they need to hire more sales people?

“The last thing they need is an acquisition like that. They need to focus on their own house,” he said.

Other analysts were equally dubious about the likelihood of a AOL-Yahoo deal.

Referencing recent volatility at the two companies, Scott Kessler, an analyst with Standard & Poor’s, said, “It seems like there’s a never-ending fountain of speculation on what’s going to happen next and honestly based on the real things that have happened nothing would surprise us at this point.”

But he quickly emphasized that, realistically, the possibility of a one-on-transaction between the two companies is “implausible… at least.”

A scenario in which Yahoo buys AOL and makes Tim Armstrong CEO seems “farfetched,” he said, and other arrangements, such as a merge of equals or AOL buying Yahoo also seem unlikely.

“As much as it’s a story people like because you have players that people are familiar with… I would be very surprised if we had a direct one on one transaction involving AOL and Yahoo,” he said. “It just doesn’t make sense.”

Bartz spent much of her time restructuring and streamlining Yahoo, so getting in bed with AOL would be like going back to square one, he said. And given AOL’s declines under Armstrong, it seems unlikely that Yahoo shareholders would see value in turning over the company to his team.

Kessler said it’s possible that a third party, such as another tech company, bank or private equity firm could get involved and bring the companies together in some way, but said he thought even that would not be in the best interest of Yahoo shareholders and is not a likely scenario.

According to reports, Yahoo is working with prominent media banking firm Allen and Co., and Adweek previously reported that AOL has the bank on retainer. But Kessler said a wide range of tech and media companies work with Allen and Co. and there’s no indication that it's brokering a deal.

“I do not see a one on one transaction—merger, acquisition or otherwise—with AOL and Yahoo,” he said. “And if it were to happen, I think it would be a mistake.”

Shares in AOL dropped Friday, falling about 5 percent to $14.72 in after hours. Yahoo closed slightly higher than its previous day’s price but dipped slightly to $14.49 in after hours.